Top line definition
/What is the Top Line?
Top line refers to the revenue line item in the income statement. The name comes from the positioning of revenue in the first or “top” line of the income statement. Organizations sometimes refer to actions taken to increase their revenues as “top line” growth.
Importance of the Top Line
Analysts focus a great deal of their attention on the top line figure reported by a business, because this is a strong indicator of performance. As long as revenues continue to increase at a rate faster than the rate of inflation, they assume that a firm is financially healthy. However, a declining top line indicates a loss of market share, and therefore a likely decline in profitability. This is a particular concern when the top line continues to decline over time.
Comparison of Top Line and Bottom Line
The top line refers to the revenue generated by a business, while the bottom line refers to its net profits. There are several differences between these terms, which are as follows:
Income statement positioning. The top line is the first line reported on the income statement, while the bottom line is the last line reported.
Indicator. The top line indicates the ability of the reporting entity to generate sales, while the bottom line indicates its ability to operate profitably and efficiently.
Influenced by. The top line is influenced by unit sales volume, pricing strategy, and market demand, while the bottom line is influenced by cost controls, operational efficiency, and tax rates.
Importance. The bottom line is more important, since profits must be generated in order to keep a business operational. Conversely, you could report strong top line revenue growth and yet still go out of business, if those sales do not translate into profits.